IRS Issues New Proposed Regulations Under The Section 1061 Carried Interest Rules

The U.S. Internal Revenue Service (IRS) published proposed regulations (the Proposed Regulations) on August 14, 2020, providing much-needed guidance on the implementation of the carried interest rules under Section 1061.¹ These rules will be of great interest to investment fund managers as well as to any service provider receiving an interest in a partnership in exchange for the provision of services. The discussion below is intended to dive into the key provisions of the new Proposed Regulations, which are detailed, mechanical and complex.

Background

A "carried interest" refers to an interest in a partnership's profits allocable to a partner without regard to such partner's capital investment in the partnership. In the investment fund context, the general partner typically does not contribute significant capital to the fund, but through the carried interest mechanism, the general partner is allocated a significant portion (generally up to roughly 20%) of the